How to withdraw money from your 401(k)

The method and process of withdrawing money from your 401(k) plan will depend on your employer and the type of withdrawal you choose. Withdrawing money early from your 401(k) can carry serious financial penalties, so the decision should not be made lightly; it's really a last resort.

Not every employer allows 401(k) withdrawals, so the first thing you need to do is check with your human resources department to see if the option is available. If it is, then you should check the fine print of your 401(k) plan to determine the type of withdrawals that are allowed.

As of 2018, if you are under the age of 59½, a withdrawal from a 401(k) is subject to a 10% early withdrawal penalty. You will also be required to pay normal income taxes on the withdrawn funds. For a $10,000 withdraw, once all taxes and penalties are paid, you will only receive approximately $6,300. 

The 401(k) Loan Option

A better option: a 401(k) loan. Instead of losing that portion of your investment account forever – as you would with a withdrawal – a loan allows you to replace the money through payments deducted from your paycheck. You'll have to check if your plan offers loans, as well as if you're eligible.

There are some withdrawals that can be taken without a penalty. For example, taking out money to help with economic hardship, to pay college tuition, or to fund a down payment for a first home are all withdrawals that are not subject to penalties, though you still will have to pay income tax, at your regular tax rate. (See Money From Your 401(k): Hardship Withdrawal vs. Loan.) In some cases, if you left your employer in or after the year in which you turned 55, you may not be subject to the 10% early withdrawal penalty.

Once you have determined your eligibility and the type of withdrawal, you will need to fill out the necessary paperwork and provide the requested documents. The paperwork and documents will vary depending on your employer and the reason for the withdrawal, but once all the paperwork has been submitted you will receive a check for the requested funds.

For related reading, see Is It Ever Wise To Make Early Withdrawals From Your 401(k)?